Several countries and Enterprises across the financial world have strengthened fiscal prudence as a precaution to avoid future meltdowns and crisis.

National Banks in Europe have now set requirements for reserves based on a weighted average of the bank’s assets, using weights that are determined by past default frequencies for different asset classes. The theory is that historical default frequencies often quite accurately reflect reserves going forward. Historical record provides a good indication for distinguishing between cyclical and more permanent components of loan performance.

However the relatively better performance of certain banks can be attributed to below key factors.

• Strict financial regulation environment enforced by the oversight boards and National Banks
• More prudent Trading practices in financial institutions and risk management practices in Enterprises
• Dynamic Capital Provisioning-Banks forced to set aside provisions during an economic boom fueled by construction and consumer spending. GRC workshops to provide hands-on compliance and controls in Enterprises
• Higher Loan Loss Provisioning than in the past. National Banks have reset the reserve requirements.
• Traditional banking focus-Most banks focus on traditional retail banking business and are less enamored by exotic business lines and products. Enterprises carefully scrutinize their GRC strategies.
• The approach to GRC securitization includes more funding, attention and controls for the most common risk transfer mechanism.
• Strict treatment of Off Balance Sheet items-All instruments need to be reflected in balance sheets and i.e. no structured products that treated as off balance sheet items
• Strong on-site supervision across the organization
• Different capital requirement for mortgage loans depending on their loan-to-value ratios.
• Holistic approach to all regulatory compliance activities

Several countries and Enterprises across the financial world will focus on all of the above requirements to strengthen fiscal prudence and increase focus and monitoring of GRC activities as a precaution to avoid future crisis.

In Enterprises as in Banks the lessons learnt is to use dynamic provisioning as a best practice with its compatibility with IFRS practices. Fiscal prudence is the key to a solid commonsense risk management.

Source: Compliance week, Financial Times, Financial Week.